Fed's View On Inflation And US Yields Would Guide The USD/INR Near-Term Direction

Published 17-03-2021, 12:36 pm

The absence of PSU Banks in the market in the last two days of this week led the USD/INR to register a low of 72.39 on Tuesday. The return of PSU Banks in the market today shall exert moderate pressure on the currency pair to appreciate to 72.70-80 level before the end of this week.

From the beginning of March 2021 till 16-3-21, the BSE Sensex registered a rise of 616 points (1.24% gain). It now seems that an all-time high of 52,516.76 registered on 16-2-21 may cap any upside rally in stocks. Domestic stocks sold-off on the back of a rise in US yields. The local stock market also reacted to the discouraging macroeconomic data recently released on inflation (CPI and WPI) and IIP.

The growth in exports in February declined to 0.67% against 6.16% growth in January. Imports grew by 6.96%. The trade deficit narrowed down to USD 12.62 billion in February from USD 14.54 billion in January. The narrowing trade deficit is at best neutral for the rupee. Gold imports surged to a 7% rise in overall imports, which widened the trade gap to USD 12.62 billion in February 2021 from USD 10.16 billion in the year-ago period.

Few of the market participants are of the view the Central Bank’s ample forex reserves suggest the pace of INR depreciation may be measured. However, given undervalued REER, expectations are now focused at 76.50 by end of December 2021. Optimism over the US fiscal stimulus measures and positive cues from other Asian markets supported the rupee to maintain its firm bias against the dollar in the near-term.  However, a spike in crude oil prices and intermittent dollar demand from oil refiners and importers may put the rupee under some pressure but the domestic currency managed its firm trend within the 72.30 to 73.00 range.

After US markets closed lower overnight, all the Asian stocks fell today led by a fall of 1% in KOSPI. Domestic stock indices are trading in the negative territory at this point in time.

Asian currencies fell today except for PESO. Asian currencies are trading weaker as the dollar regained close to 92 levels in the last three days.

The dollar is now trading at 91.90 as investors wait for the outcome of the Fed’s two-day policy meeting later in the day. 10-year US Treasury yield fell to 1.6150% as the market looked ahead to the Fed minutes and the latest Government auctions. The gap between the yields on 2-year and 10-year Treasury notes flattened to 146 bps, its steepest fall since 2015. Last week, the benchmark US yield spiked to a pre-pandemic high of 1.6420% up by 50 bps in a month and by about 70 bps from the beginning of January. Market players keenly watched for the outcome of the Fed’s two-day monetary policy meeting for cues on the Fed’s approach to the recent spike in the Treasury yields.

The Bank of Japan begins a two-day policy meeting on Thursday along with an extensive policy review. The yen is now trading at 109.15 against the dollar after falling to a low of 109.3650 on 15-3-21, a 9-month low.

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